Finance news. My opinion.

Sweden’s central bank, the world’s oldest, cut the benchmark interest rate to a record-low 0.5 percent to revitalize an economy mired in its worst recession in more than half a century.

The Stockholm-based Riksbank, founded in 1668, lowered the seven-day repo rate by half a percentage point, with one of the six policy makers voting for a three-quarter-point cut, the bank said on its Web site today. Twelve out of 21 economists in a Bloomberg survey forecast the size of the reduction.

The bank “will probably have to cut rates again at its next meeting in July,” said Stefan Hoernell, a senior economist at Svenska Handelsbanken AB. The bank’s forecast for economic growth in 2010 is too optimistic, he said.

The largest Nordic economy sank into its first recession since 1992 last year as a global decline in trade eroded demand for exports, which Sweden relies on for half its national output. Slumping production has forced up unemployment, sapping consumer demand and triggering deflation.

Riksbank Governor Stefan Ingves has cut borrowing costs more than his counterparts in neighboring Norway and at the European Central Bank, signaling in February the possibility of zero rates. Today’s reduction makes the Riksbank the 15th major central bank to lower rates this month. The U.S. Federal Reserve targets a key rate as low as zero, while the ECB on April 2 cut its benchmark to a record low 1.25 percent.

‘Proactive’

The krona gained against the euro after the decision, trading up 0.8 percent at 11.1510 at 9:55 a.m. in Stockholm.

“The repo rate is expected to remain at a low level until the beginning of 2011,” the bank said in the statement. “If economic activity deteriorates more than expected in the future, the Riksbank has the possibility to resort to other measures.”

The bank has been “proactive since easing policy for the first time in October 2008,” said Sunil Kapadia, an economist at UBS Investment Research in London, in a note before the announcement. “The economy is in a much deeper downturn than anyone, including the Riksbank, had expected.”

The inflation rate slumped to an annual 0.2 percent in March, the lowest in four years, and the bank forecast today consumer prices will fall 0.3 percent this year. It targets annual price gains of about 2 percent.

‘In the Red’

“Inflation will be deeply in the red in a matter of months,” Kapadia said. “Unemployment has increased more rapidly than we, and the consensus, had forecast, which implies further downward pressure on prices.”

The economy will contract 4 instant cash advance no fax.5 percent this year and return to growth in 2010, the bank said today. Unemployment will soar to 8.9 percent this year, the government predicts. The bank forecast joblessness will rise to 10.7 percent in 2011. Swedish companies including Volvo AB, the world’s second-largest truck maker, and Sony Ericsson Mobile Communications Ltd., the mobile phone venture between Sony Corp. and Ericsson AB, will cut jobs to cope with contracting markets.

The government, which bases its forecasts on a key rate of 0.25 percent by the end of this year and through 2010, has pledged to spend 45 billion kronor ($5.2 billion), or 1.5 percent of gross domestic product, this year on measures to boost jobs including tax cuts, infrastructure, schools and research. Spending will rise to 60 billion kronor in 2010.

‘Limited’ Room

“Room for further political stabilization measures is very limited,” Finance Minister Anders Borg said last week, adding to pressure on the central bank to revive growth. Sweden will post a 2.7 percent deficit of gross domestic product this year, widening national debt to 38.7 percent of GDP, Borg said. This will rise to 60 billion kronor in 2010.

Ingves, one of the architects of Sweden’s 1990s bank rescue with National Debt Office Director-General Bo Lundgren, said on March 31 the global financial system must be “purged” before credit flows can be restored and economies return to growth.

The Riksbank, whose history encompasses the financing of the Swedish kingdom’s war with Russia in 1741 to 1743, has pumped 400 billion kronor of loans denominated in dollars and kronor into the financial system since October to revive lending. The country’s banks, which avoided sub-prime mortgage lending, risk a deterioration in asset quality because of lending in the Baltic states of Latvia, Lithuania and Estonia.

The outlook for the Swedish banking system is negative, while a “significant” threat to the sector “derives in particular from the sizeable exposure” of some Swedish banks to the Baltic countries, Moody’s Investors Service said on March 5.

SEB AB, the second-largest Baltic lender, had its credit and financial strength ratings cut by Moody’s on April 7 after the ratings company said the Stockholm-based bank risked higher loan losses in Estonia, Latvia and Lithuania.

Swedish banks have claims in Latvia, Lithuania and Estonia worth about $75 billion, according to ING Groep NV.

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